Shortchanging The Future

Regular readers of this newsletter know I am no fan of the DuPont (DD)-Dow (DOW) merger, which will reduce research spending at both companies. Nor do I care for the jack-up-prices-and-slash-research business model of pharmaceutical companies like Valeant (VRX) and Turing. Those moves are celebrated by activist investors, who argue much R&D spending isn’t “efficient” – by which they mean it isn’t putting money in their pockets quickly enough. The demise of R&D by U.S. companies, compounded by cutbacks in government R&D spending, has led to a notable decline in R&D spending in the U.S. in the last decade, measured as a share of GDP.

In the January issue of Fortune, my colleague Chris Matthews takes a deeper look at this phenomenon. We are publishing his story today online. He notes that DuPont labs provided us with such products as Velcro and Teflon (how could we live without either!), while Dow was the creator of Styrofoam. Other proud labs of yore included AT&T’s Bell labs – its ex-campus is now a mixed-use, urbanist real estate development in New Jersey — and Xerox PARC, where the computer mouse was born.

One of the issues here is what counts as R&D spending. The activists want research that quickly translates into profits. That has meant a reduction in basic research. Matthews cites a study by three economists showing the percentage of publicly traded companies that published research in scientific journals dropped two thirds from 1980. “Corporations value basic science less and demand less of it” than they did 35 years ago, says Ashish Arora, one of the authors.

Meanwhile, Chinese companies, goaded by the government, are bulking up on R&D. The Chinese commitment to R&D has doubled since 2008, If current trends continue, China will surpass the U.S. as the leading R&D spender by the end of the decade, according to the OECD.

Does it matter? Only if you care about the future.

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